Thursday, January 14, 2016

On December 21, 2015, John Horrigan and Maeve Duggan of the Pew
Research Center released a new report entitled “Home
Broadband 2015.” A significant takeaway from the report is that the
percentage of adults in the United States with a home broadband connection slightly
declined from 70 percent in 2013 to 67 percent in 2015. During the same span, the
percentage of “smartphone-only” adults increased from 8 percent to 13 percent.
This negative correlation in adoption patterns means that as mobile networks
continue to improve with respect to speed, latency, and coverage, more and more
consumers are considering mobile broadband to be a substitute for fixed
broadband.

Individuals have different preferences, so while some consumers may use
a mobile broadband subscription as a substitute for a fixed home broadband
subscription, other consumers may not find this attractive. Certainly income
plays a role in determining an individual’s preferences. For example, a wealthy
consumer in a large household may more readily view fixed and mobile
subscriptions as “complements,” while a low-income individual, who lives alone,
may more readily identify the two as “substitutes.” As the Pew report states,
“smartphone-only” adults are generally younger, lower-income, and non-white. And
despite the fact that household incomes have declined in recent years relative
to 2000 levels, Mr. Horrigan and Ms. Duggan say smartphones and mobile
connections have filled the digital divide gap.

A demonstration of the substitutability of fixed and mobile broadband
is important in no small measure because the FCC "misinterprets" data to suggest that
the broadband market is not competitive. Notably, in the FCC’s February 2015 Open Internet
Order, the Commission claims that “mobile broadband is not a full
substitute for fixed broadband connections.” More recently, in the FCC’s
December 2015 Wireless
Competition Report, the Commission claims that “mobile and fixed services
are not co-extensive in their capabilities.” The FCC apparently makes these
claims in order to justify its flawed market analysis, suggesting that
consumers and edge providers do not have choices when it comes to broadband
Internet access because claimed switching costs and “gatekeepers” stand in the
way. Although the claim is still very flawed, it is much easier to make such a
claim about broadband competition if the entire mobile broadband market is
eliminated from the data sample. (See Michael Horney’s August
2015 blog for more on this.)

On December 30, 2015, the FCC released its 2015 “Measuring
Broadband America Report.” The report highlights the following findings:
actual speeds experienced by most ISPs’ subscribers are close to or exceed
advertised speeds; average speeds more than tripled from March 2011 to
September 2014; and consumers subscribing to faster services (15-30 Mbps down) tend
to migrate upward to a service tier with a higher advertised download speed,
while only a small percentage of consumers with slower services (less than 15
Mbps down) migrate upward. The last finding shows that the consumers who value faster
broadband service are willing to pay for such service. Similarly, consumers who
value having both a fixed and mobile broadband subscription are willing to pay
for both, while those who do not value having both may use mobile broadband as
a substitute for fixed broadband or vice versa.

FSF Board of Academic Advisor member Gus Hurwitz wrote an article on
January 6, 2016, entitled “Is
Good Broadband News for Consumers Bad News for the FCC?” Given that the
2015 “Measuring Broadband America Report” contained such positive news for
broadband consumers, Mr. Hurwitz finds it interesting that the FCC would
release the report during the slowest news week of the year, especially considering
that the previous years’ reports were released during the summer. Referring to the
positive findings in the FCC’s report, Mr. Hurwitz writes:

All of this tends to contradict the
concerns used to justify the FCC’s recent interventionist agenda. Chairman
Wheeler’s aggressive plans are built on fears that the broadband market offers
too few consumers too few options of too little quality for too much money.
This report paints a very different picture: the market is consistently giving
consumers increasingly better service at ever-lower prices. Importantly, the
data for this report are from September 2014, so they predate the FCC’s recent
efforts to “protect and promote” competition.

It is unfortunate that the FCC would misuse data to promote its pro-regulatory
agenda. Maybe the report was released as soon as it was finished. Regardless,
it is clear that a snapshot of the broadband market as it actually existed
during the Open Internet proceeding looks
vastly different from what the FCC depicted in its Open
Internet Order.

It’s time for the FCC to recognize that mobile broadband and fixed
broadband are substitutable services. Even assuming for the sake of argument
that the data available in February 2015 (when the Open
Internet Order was drafted) somehow suggested that the two were not
substitutable (although the data did not suggest this), did FCC officials
really think that mobile connections were not rapidly improving in quality and
decreasing in price-relativity over time?

The fact that 13 percent of Americans in
2015 were “smartphone-only,” which is more than a 60 percent increase in two
years, shows that a growing number of consumers perceive mobile and fixed
broadband to be substitutable services. And the fact that the most recent government
report shows that nearly half of U.S. households are “wireless only” is
relevant too. Surely, many of the
consumers in these households will be upgrading to smartphones in the near
term.

The increasing substitutability of
mobile and fixed broadband services is making an already competitive broadband
market even more competitive. The Commission should not ignore the actual realities
of the marketplace and clear patterns of consumer behavior in order to pursue a
pro-regulatory agenda. Indeed, it's time for the Commission to change its pro-regulatory mindset so that, in the absence of clear and convincing evidence to the contrary, the agency presumes the existence of competition rather than the other way around.